FINANCIAL AND MONETARY AFFAIRS
The HKMA has broadened its approach to supervision, which was previously reliant on on-site examinations. Such examinations are still an integral part of the supervisory process, but are supplemented by off-site reviews and prudential meetings with authorised institutions. Off-site reviews involve the analysis of regular statistical returns, and accounting and other management information supplied by institutions with a view to assessing their performance and compliance with the Banking Ordinance. Such reviews are followed by interviews with the senior management of institutions, at which the business, prospects and potential areas of concern of institutions are discussed. This broader approach to supervision has enhanced the HKMA's ability to identify potential areas of concern, which can be followed up by on-site examinations. 'I
As an international financial centre, Hong Kong's banking supervisory policies are in line with international standards, especially those recommended by the Basle Committee on Banking Supervision. In 1992, the Basle Committee issued a set of minimum standards that the G-10 countries have agreed to apply in the supervision of international banking groups and their cross-border establishments. These standards are designed to provide greater assurance that no international bank can operate without being subject to effective consolidated supervision. To ensure compliance with these standards, Hong Kong added them to its bank licensing criteria in September 1992. In the case of a foreign applicant, its home supervisor must have established, or be working to establish, the necessary capabilities to meet the minimum standards.
In February 1993, the same requirement was added to the licensing criteria for restricted licence banks and deposit-taking companies.
The Basle Committee issued another paper in 1992 setting out a number of proposals on the supervision of liquidity for consideration by banking supervisors worldwide. In the light of these proposals, the HKMA carried out a review of its own regime on the supervision of liquidity. A working group on liquidity, comprising representatives nominated by the Hong Kong Association of Banks and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies, was established to consider the proposals put forward by the HKMA. Two consultation papers, setting out the details of a proposed new approach towards the supervision of liquidity, were issued in April and July, respectively, for comment by the banking industry. Under the proposed new approach, the adequacy of an institution's liquidity would be assessed having regard to six factors: liquidity ratio, maturity mismatch profile, ability to borrow in the interbank market, intra-group transactions, loan to deposit ratio, and diversity and stability of deposit base. After extensive consultation, the proposal was found acceptable by the market. The HKMA plans to implement the new regime in June 1994.
Due to the rapid rise in property prices and speculation in the property market, the government issued in 1991 a number of warnings about the need for greater prudence in residential mortgage lending. In November that year, a number of leading institutions responded to these warnings by lowering their loan-to-value ratio for residential mortgages to 70 per cent, which then quickly became an industry norm. Since then, the HKMA has worked to ensure that the guideline is observed by all authorised institutions. The HKMA conducts a monthly survey on the residential mortgage lending of a sample of 33 institutions, which together account for about 94 per cent of such lending in Hong Kong, to monitor the possible impact of the guideline on the residential property market and on the mortgage business of institutions.
69